Formation of People’s United Merchant Services

On July 17th, People’s United Bank and Vantiv announced the formation of a joint venture, People’s United Merchant Services, which closed in the 2nd quarter. First Annapolis served as the exclusive advisor to People’s United Bank.

Both companies contributed merchant accounts to the partnership, including the total People’s United Bank portfolio, which had over 5,300 merchants and processed over $1 billion in bankcard volume in 2013. Vantiv and People’s United Bank have an eight-year history working together on debit processing and ATM services. As part of this alliance, People’s United Bank will retain a 49% ownership share in the joint venture and recognized a $20 million gain on the formation of the alliance.

The formation of this joint venture supports a two-decade trend of banks pursing joint venture and revenue sharing alliance partnerships. We have identified several common forces that are driving this trend:

Specialization: Many acquiring operations, such as merchant underwriting, are specialized and sub optimized when a bank leverages its generalized/shared services operations. Non-banks have a razor focus on acquiring and bring a level of specialization and experience that can drive growth in the business.

Complexity: Merchants’ needs are becoming increasingly complicated due to POS change, multi-channel needs, and data security requirements. Acquirers are investing heavily to meet these needs, and some banks have found it difficult to stay competitive and current given their other business lines and initiatives.

Scale: Scale, though not a decisive characteristic, is nevertheless central to competition, and large acquirers have a cost advantage of 2x – 3x the average acquirer (say, <10¢ compared to 25¢ – 30¢ per transaction).

Banks represent an attractive sales channel for acquirers. With long sales cycles, strong incumbency advantages, and a decreasing number of new banks to partner with, banks are well positioned to negotiate attractive partnership terms. To that end, we have seen some changes in the structure and key terms of bank – non-bank partnership agreements that generally favor banks, as shown in Figure 1.